Combining flexible regulatory and economic instruments for agriculture water demand control under climate change in Beauce

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Abstract

Agricultural water management is becoming a critical issue in many parts of the world and cost-effective water policies are required to control water use. We examine the case study of irrigated agriculture in Beauce, France (9750 km2, Europe's largest cereal producing region). We explore the mechanisms for water abstraction control involving a combination of regulatory and economic instruments. The analysis is conducted with a hydro-economic model that includes a calibrated economic model and a semi-distributed calibrated hydrogeological model. First, we analyse the system currently used to manage groundwater abstraction. It includes a flexible quota system, revised annually as a function of the state of the groundwater, combined with a tax. This dual system performs better than a single instrument because of regional hydrogeological and economic specificities, as well as the fact that it limits costs for farming. We then investigate the impact of alternative combinations of instruments. Our findings show that the most cost-effective and robust way to improve the groundwater state is to increase the economic component (a flexible tax) in association with a flexible quota system.

Introduction

With increasing environmental constraints and rising water demands, managing water allocation has become a critical issue in many parts of the world. In the farming sector demand for irrigation is significant and growing [1]. The sector is also affected by greater regulatory and climatic constraints. Related problems include the over-allocation of water for agricultural purposes with respect to resource capacity [2]. In this context, both institutions and individuals are developing coping strategies. Thus, there is clearly a need for instruments that are capable of meeting environmental performance targets and limiting the cost of diminishing water availability. These instruments should take into account adaptation of farmers, as well as variability and uncertainty of water resources (supply capacity and demand). The policy debate about the best combination of instruments is central to the majority of environmental problems and is characterised by the control of negative externalities or the provision of public goods.

Essentially, two types of instruments can be adopted by policy makers. The first type is geared to quantitative control, such as norms or quotas, which limit input use or output emissions. The second type includes price-based or economic instruments, such as taxes on inputs or outputs, as well as subsidies intended to encourage the adoption of good practices and technologies. Economic instruments are expected to affect input use by increasing or decreasing the cost for the producer or consumer. Thus, they provide an incentive in terms of the cost-effective allocation of scarce resources. However, this may fail to change farmer behaviour if the “cost of change” (which is not only monetary) exceeds the benefit of change, because ultimately, the economic and technical choice of adaptation depends on the farmer [3]; Chap. 1). Rey et al. [4] review the implementation of economic instruments throughout Europe. A variety of economic instruments can be considered as discussed by Koundouri [5]; for example: trading quotas (markets), revising cap or tax levels, buybacks [6] or combining instruments. Other type of instruments, such as voluntary-based mechanisms also exist.

From a purely theoretical point of view these two main types of instruments are equivalent (Weitzman, 1974). However, information asymmetries, uncertainties about processes (water demand) and rationality are just some of the factors that undermine this equivalency.1 Economic instruments, such as taxes, also have the so-called double dividend advantage: they generate public revenues that can be used to improve water management2 in addition to incentivising behaviour. However, often they also imply high transaction costs. Although economic and regulatory instruments are often opposed, they can be more effective and cost-effective when used in combination. In this study, we explore how such a combination can cope with variability and uncertainty in terms of water supply and demand. The Tinbergen rule3 states that each policy objective requires a specific instrument to have an effective policy mix. Young [7] develops this rule for agricultural water management and for the design of efficient administrative settings of water use and allocation. He suggests, among other rules, to “unbundle” policy objectives e.g. to distinguish historic/permanent entitlements and yearly/daily allocations of water.

This paper examines water abstraction control mechanisms and the robustness of original combinations of instruments in Beauce, in a reference scenario and for future scenarios of climate change and price uncertainty. Beauce is located in the “central” region of France. It is the main cereal-producing region in Europe [8]. Farmers irrigate a significant share of the cropping area. Given the sensitivity of the water resource, water policies have been adopted to control withdrawals for more than 20 years in order to avoid drought in connected surface watercourses [9]. A flexible quota is revised annually depending on the groundwater level in four regions in Beauce. Thus, farmers face varying constraints from year to year. This quota is combined with a tax on water abstraction (from the WFD). The quota has been designed locally to safeguard piezometric levels. The tax has not been designed locally, as it has been introduced with the WFD and the french water law. The rationale is both to have farmers contributing financially for their potential harm on the environment and to act as an incentive to save water, as mentioned above with the double dividend advantage. The analysis of the control mechanisms for water withdrawal is supported by a theoretical analysis and a calibrated hydro-economic model (HEM) that represents farming behaviour and connected groundwater resources. This original contribution to the literature showcases Beauce's unique control mechanism for groundwater abstraction. It provides an economic analysis and explores the effectiveness and cost-effectiveness of alternative combinations of instruments to increase environmental compliance and limit social cost. Several alternatives are considered: (i) economic instruments, such as flexible taxes that depend on the yearly state of groundwater resources and higher taxes and subsidies to reduce water use (buy-backs and premiums to reduce irrigation); (ii) alternative regulatory measures, such as increased restrictions and spatial disaggregation in terms of piezometric head monitoring and restriction; and (iii) a supply side option, involving groundwater substitution. We also test the robustness of alternative combinations of instruments in relation to their capacity to cope with uncertainty and avoid undesirable outcomes.

A pragmatic approach is required to explore the cost and effect of policies for improving the management of water resources and to analyse the observed water allocation and behaviour. Hydro-economic models are a vast ensemble of models characterised by at least one representation of economic processes (production and/or consumption) and hydro (geo)logical processes (see e.g. Harou et al. [10]. The principle of hydro-economic models is to connect these different compartments. The models represent the real world rules and processes of case studies, which link the parameters within the hydro-economic system under study. The economics and biophysics of water resource dynamics can be considered together when the cost of the resource and the regulation (i.e. water rights or water restrictions) are dependent on the state of water resources and when water uptake (by economic agents) impacts the water resources. It is important to consider specific economic processes, such as farming's adaptation to changing constraints and institutional adaptation to regulate access to water (in response to the impact of climate change or global change) in order to ensure that the resulting economic and hydrologic balances are not distorted. Assessing the impact of climate change on water resources already presents a scientific challenge, even when economic factors are not considered [11,12]. However, the impact may be over- or underestimated, if we fail to account of the increase in crop water requirements that are not satisfied because of regulations or the farming sector's capacity to adapt.4

The rest of this paper is organised as follows: after this introduction, the second section presents groundwater management and policies in Beauce; the third explains the background to hydro-economic modelling and robustness; the fourth describes the hydro-economic model; the fifth presents the simulation results of the reference situation and alternative instruments with climate change scenarios.

Section snippets

Farming and irrigation in Beauce

Beauce is Europe's main cereal producer. It is one of the most irrigated farming regions in France and covers about 650 000 ha. Fig. 1 shows its location, as well as the irrigated and non-irrigated areas. Since the 1970s, irrigation has developed substantially to cope with dry years, secure high yields and enable the diversification of crop production, particularly crops grown under contract for the agro-food industry. Depending on the year, between 120 000 and 240 000 ha are now irrigated

Current approaches in hydro-economic modelling

The growing concern about the need to coordinate economic and environmental policies calls for a global understanding of the interaction between socio-economics and the biophysical functionning of water resources and related ecosystems. Hydro-economic modelling is a pragmatic response to the need to represent the biophysical and economic system as a whole. The aim of developing this type of model is to understand the impact of climate change (or other global change scenarios) and to simulate

The Beauce hydro-economic model

We develop a hydro-economic model of agriculture and groundwater in Beauce. It is composed of six independent regional models. The main advantage, which justifies the choice of a holistic hydro-economic model (instead of a compartment model), is that it facilitates the exchange of input and output parameters between models. In our case, this means we can conduct a multiple year simulation, as well as numerous policy or scenario simulations. Three main dynamic connections between the economic

Results

The different simulations performed are presented in Table 2. Two main types of indicators are considered for the analysis: (i) effectiveness indicators which are for instance the piezometric level or the frequency with the piezometric level respect thresholds and (ii) cost indicators of the policy. The model produces a lot of other output values that could have been analysed (water use, cropping patterns, quantities produced …), but for sake of clarity and to keep the focus on instrument's

Conclusion

The main local instrument in Beauce, which is a flexible quota system, is highly original. As far as we know, it is unique. It has the advantage of introducing flexibility in an instrument with a rigid design. It is coupled with an economic instrument, a low tax on water use which is not a local policy instrument but a european water policy instrument. Although the incentive is very modest, it is sometimes acting on behaviour. The flexibility limits the cost for farming, while ensuring that

Acknowledgements

This research was conducted while I was at BRGM and supported by the Scientific Direction of BRGM, as part of the MODELECO and OPTIQUANT projects. I would like to thank S. Schomburgk for the hydrogeological zoning, data collection, editing and discussions on the hydrogeological model. I would also like to thank F. Verley (DREAL - Région Centre) for his encouraging discussions on this work, J.D. Rinaudo (BRGM) for his valuable comments on an earlier version of the paper, J.C. Maréchal (BRGM) for

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